To understand the implications of cost and value additions at the different stages of inventory movement in the supply chain, it becomes necessary to map the supply chain. Mapping will give an insight into the scope and opportunities that exist for cost reduction and productivity enhancement. The movement of inventory across the supply chain is facilitated through various logistics operations with information support. The break-up of an operation into smaller elements is crucial in order to know a value-added and non-value added activity, the time frame for performing that activity and its cost implication.
The purpose of supply chain mapping (Figure 3.2) is to find out the non-value-added activities that add to the cost and the order performance cycle time, which have a direct impact on customer service. For example, the conversion of raw material to a finished product is a value-added activity. But within the manufacturing process, materials have to be moved from different work stations and are kept waiting for processing for a longer time because of improper sequencing or process layout, or because the machine capacity is not compatible with the material flow. Hence the work-in-progress inventory hold-up is a non-value-added activity. Similarly, in distribution, holding of inventory in excess of the demand for a longer time is a non-value-added activity. All non-value-added activities block resources, which can otherwise be used for productive purposes. The resources may be money, manpower, machine, space or time, which are scarce and have time-and-place utility value. Non-value-added activities are, in fact, a drain on the company’s resources and reduce system performance. These activities need to be identified and not only reduced but minimized to make the supply chain lean.
Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.